Florida Insurers Need Rate Increases, Says Rating Expert

July 21, 2010

Florida’s property/casualty insurers appear to have adequate reinsurance and capital in place to withstand at least two major storms this season but their overall fate could hinge on whether they are allowed to raise their premiums as much as they need to in coming months, according to an insurance rating expert familiar with many of the state’s carriers.

Insurers may need to raise prices more than they are now doing to cover the costs of that reinsurance and their other expenses as well as to satisfy investors, according to Joseph Petrelli, president, Demotech.

“I think over the last several years the companies have drawn down on funds available from their holding companies, on funds available from investors. We believe we’re at a critical point here where … over the next several months, and the next year, it’s going to be critically important for companies to be able to secure an adequate rate, not just a rate increase of X percent, but it maybe a very painful rate increase of 2X percent,” Petrelli told Insurance Journal in a recent interview.

Petrelli’s Ohio-based actuarial services firm has developed a specialty in rating Florida insurers. It rates about 50 of the property/casualty insurers writing in Florida; for about 30 of these insurers, Demotech’s is their only rating.

Some insurers are asking for and receiving approval for rate increases of 15 percent or lower because anything higher triggers an administrative hearing, but Petrelli fears even 15 percent hikes may not be adequate.

“[T]he indicated rate change, the amount that the company needs, typically is well in excess of that and there is sort of a cumulative effect,” said Petrelli. “It’s kind of like if you look at people’s salaries, people would love to get a 10 percent raise every year. If in fact they only get three percent a year, then they fall behind quickly when their needs or their expectations are 10 percent a year.”

Petrelli discusses rates, reinsurance, and his own company’s ratings of Florida companies in an exclusive interview with Insurance Journal. The entire interview may be heard on Insurance Journal TV.

As for reinsurance, Petrelli said Demotech has required firms to either buy more reinsurance or, if they want to save money on reinsurance and retain more of the risk instead, told them they have to obtain more capital. He said that insurers his company rates have attracted more than $100 million in new capital into the system in the first quarter alone.

“What we have said to those companies is, ‘Alright, if you are going to save X million dollars, we want you to infuse the X million dollars into your insurance company.’ So we’ve been working with these companies. In the first quarter of 2010 by itself, there’s been $100 million of new capital infused into the companies we work with. We’ve also had them purchase additional reinsurance when we felt that was appropriate,” he said.

He said his firm has worked to assure that each of these companies is prepared to withstand something in the vicinity of two 1 in 100 years storms.

“I’ll be candid… I think we should all pray to God if there’s three. But our goal was to have the companies solvent, and by that we mean above minimum capital and surplus, capable of paying their claims to big whacks. That’s been our goal.

“I think at this point in time the companies are very well protected against a couple of large storms and we would say concurrently from a couple of little storms. So I mean very comfortably, one small storm, one or two big ones. We think the state of Florida has never been in better shape,” Petrelli said.

According to the rating expert, it’s not just reinsurance costs and losses behind the need for rate increases. Investors, too, are adding to the pressure on Florida insurers to raise their prices.

“It’s like anything else, whether it’s a privately held insurance company or a publicly traded one, at some point in time, the investors are looking to get a return on their investment. They are not looking to continue to write checks based on what might happen down the road. Many of the holding companies in Florida have been able to fund deficiencies in the premium, but the amount that’s ceded off to the reinsurer, the amount of the premium is so relatively large, that it’s come to the point now where the base premium that consumers pay looks like it needs to go up substantially,” Petrelli said.

Petrelli was asked to identify what he thinks are the biggest misconceptions about Florida’s property insurance system and about his own company’s ratings of insurers.

He said he thinks many Florida residents do not believe the current system with the state’s catastrophe fund and state-backed Citizens Property Insurance will work even though it was tested in 2004 and 2005 and it did. “I think that they don’t even realize that the system does work and they are paying for that system that works, whether they have a property insurance or not, because it’s all premiums that are assessed,” he said.

As for Demotech’s ratings, he said he thinks some people may believe Demotech only hands out good ratings, when that’s not the case. “The truth of the matter is about a third of the companies that approach us do not get a rating of “A” or better. Only about two-thirds of the companies that approach us get a rating of “A” or better. So the fact that we only support financially sound companies may lead to a misconception that we give away ratings like candy…[N]othing could be further from the truth. Our rating process actually eliminates 30 to 35 percent of the companies that approach us,” he said.

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